Mergers and Acquisitions are important events in businesses that demand great scrutiny. In the world of business, they call it due diligence. Now why is financial due diligence so important in M&A transactions?
Due diligence is imperative because it is practical for a purchaser interested in buying a company in an M&A transaction to have all the information possible about the target company before going through with it. Due diligence involves a meticulous scrutiny of the historical activities and potential pitfalls of the target company.
What Is It?
Contrary to what most people think, financial due diligence is not another financial audit. Unlike an audit, it’s not an opinion statement. Instead, it is a coalescence of facts and figures acquired by delving deep into the historical trends of the company. The scope of this research is very large because it typically covers quality and sustainability of revenues, debts, liabilities, net asset quality, capital expense requirements, working capital requirements, etc. Based on the findings, the purchasing company should take a call.
When Do I Need to Do It?
Once you have identified a company to purchase, you have run it by the other board members, it’s time to engage in a financial due diligence. This should be before or at least while the negotiation is going on with the potential target. Ideally, it should commence just when the letter of intent has been sent over and accepted by the other party. It takes a considerable amount of time to complete the research considering the depth of it. So, you should at least have four weeks in hand.
Who Should Conduct It?
While a financial due diligence can be done by your own accounting team, they will not bring the rigour and experience of specialists in this field. CA firms of a certain size and vintage are usually well-equipped to do a financial due diligence. There are many advantages of involving a firm with a dedicated transaction advisory team. First is neutrality that comes with a party unassociated with your or the other business and second, the level of knowledge and skill that come with these professionals. These people have in-depth knowledge of the dynamics that is typical to M&A environments.
What Kind of Information Should I Target?
This depends a lot on the reporting capabilities of the company concerned. Typically, one must target past financial statements, itemized trial balances, management accounts, ledgers, reports, business budgets and plans, forecasts and current operating results.
What Will I Get Out of It?
You will get answers to a lot of questions regarding the target company or the soundness of its financials. A financial due diligence report will give you a detailed overview of the company’s financials, tax demands, potential liabilities and exposures, asset credibility, etc.